Tech’s New Hotbeds: Cities With Fastest Growth in STEM Jobs Are Far From Silicon Valley

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The conventional wisdom sees tech concentrating in a handful of places, many dense urban cores that offer the best jobs and draw talented young people. These places are seen as so powerful that, as The New York Times recently put it, they have little need to relate to other, less fashionable cities.

To a considerable extent, that was true – until it wasn’t. The most recent data on STEM jobs – in science, technology, engineering or mathematics – suggests that tech jobs, with some exceptions, are shifting to smaller, generally more affordable places.

What we may be witnessing, in fact, is a third turning in the tech world. The initial phase, in the 1950s, was mostly suburban – dominated by the still-powerful Bay Area, Boston and Southern California – and was heavily tied to aerospace and defense. The second phase, now coming to a close, refocused tech growth in two hot spots, the Bay Area and Washington’s Puget Sound, and largely involved social media, search and digital applications for business services.

The third tech turning, now in its infancy, promises greater dispersion to other markets, some with strong tech backgrounds, some with far less. In the last two years, according to numbers for the country’s 53 largest metros compiled by Praxis Strategy Group’s Mark Schill based on federal data and EMSI’s fourth-quarter 2017 data set, the STEM growth leader has been Orlando, at 8%, three times the national average. Next are San Francisco and Charlotte (each at 7%); Grand Rapids, Michigan (6%); and then Salt Lake City, Tampa, Seattle, Raleigh, Miami and Las Vegas (5%).

Why Are New Players Rising?

Silicon Valley, along with its urban annex, San Francisco, seems likely to remain the tech center for the foreseeable future. The area accounted for 44% of the country’s venture capital funding in 2014, according to a Brookings analysis of Pitchbook data, and the San Jose and San Francisco regions’ STEM employment – more than 440,000 jobs – is larger than that of greater New York, which has more than twice the population. The highest location quotient, essentially the percentage of STEM jobs per capita, can be found in the Valley – a remarkable 3.38 in 2017 – while the San Francisco area comes in at roughly half that rate, with an LQ of 1.76, just behind the figures for Seattle and Washington, DC.

But recently there have been signs that the tech sector’s growth in the region is slowing, despite the presence of Google, Facebook and Apple, three of the world’s most highly valued companies. From 2006 to 2016, the Valley saw a remarkable 33% growth rate in STEM jobs – roughly 3% per year. But in the last two years, that rate has fallen to 2% annually. In some recent months in parts of the Bay Area, The San Jose Mercury reports, the tech job count has actually declined.

One limiting factor could be high housing costs. A recent report from the state Legislative Analyst’s Office showed that many CEOs, particularly in Silicon Valley, regard severe housing unaffordability – where you need to earn more than $200,000 annually to buy a median-priced house – as their biggest business challenge.

The effects can be seen in domestic migration, which despite the boom has been declining since 2012. Old-time Silicon Valley residents can celebrate the rapid appreciation of their homes, but for new entrants the prospects are bleak. If millennials continue their current rate of savings, notes one study, it would take them 28 years to qualify for a median-priced house in the San Francisco area – compared with five years in Charlotte, or three years in Atlanta. This may be one reason that, according to a recent ULI report, 74% of Bay Area millennials are considering a move out of the region in the next five years.

Who Are These New Players?

If the Valley is slowing, one might expect the slack to be picked up in places that are heralded – at least by their boosters – as tech havens, places like Chicago, New York and Los Angeles. Instead, the fastest STEM growth is occurring in somewhat less ballyhooed places that have far lower housing costs and typically have less onerous tax and regulatory regimes.

Several factors may be in play. In the early part of the decade, notes a 2016 Brookings study, software focused on such things as search, social media and systems design; now, much of the impetus is coming from manufacturing-related industries, such as autos and industrial products, which may help explain the strong growth experienced by places like Grand Rapids.

That metro is also home to 17 universities and colleges, which guarantee a steady flow of tech workers. Low housing costs are certainly a potential allure; Trulia recently ranked the region as the housing market best “poised for growth” in 2018. The area boasts successful firms like Open Systems Technologies, a provider of IT services that employs about 140 people in its headquarters near downtown.

Charlotte, another new high-flier, also takes advantage of lower costs, a revived downtown area and ties to the financial service industries. The real estate firm CBRE named the city its top “momentum market” in 2016 based on its tech-talent growth rate from 2010 to 2015 (74.7%). It was followed by Nashville, with a 67.9% rate; both outpaced the Bay Area, at 61.5%.

Finally, there’s our fastest grower, Orlando, a city better known for Mickey Mouse than high-tech. Like Charlotte, Grand Rapids and Nashville, the city benefits from a combination of lower housing costs and enough amenities to attract millennials. Some companies, like Arrow Sky Media LLC, which specializes in animation and game development operations, and Finexio, a financial technology company, have recently relocated to Orlando, the latter firm from Silicon Valley. These decisions follow recent moves to Orlando by ADP and Deloitte, with 2,850 employees hired between the two companies, a majority of them tech workers.

For many of these emerging markets, the tech boom has accompanied growth in their central cores. But locating in a downtown or adjacent area in a smaller city is not the same as doing so in a megacity like New York, Los Angeles or Chicago: Tech workers can find affordable environments in the relatively dense areas but, as they age, can also settle in affordable, leafy suburbs, many of which are just a short commute away.

These options are not so readily available in our largest metros: Chicago, New York and Los Angeles. Although journalists and local boosters have claimed all three places are “the next Silicon Valley,” their tech growth from 2006 to 2016 was below average, and all now have location quotients below the national average (New York’s, for example, was 0.89 for 2016).

While these regions’ cost of living may pose the biggest threat, millennials, the fuel for tech firms, also may not be as urban-centric as some have predicted. Their numbers have recently dropped or plateaued in the much-celebrated core cities of Boston, Chicago, Los Angeles and New York after rising earlier in the decade. In contrast, many Sun Belt areas – Nashville, Charlotte, Houston, Dallas-Fort Worth, Austin, Orlando – enjoy stronger net population growth in those between 25 and 34 than coastal California and the Northeast.

A recent downturn in the energy industry – a major source of STEM employment – has led to a decrease in jobs in such places as Houston, Oklahoma City and New Orleans.

What Will The Third Turning Tech Environment Look Like?

Of course, none of this is to suggest that anyone will challenge Silicon Valley/San Francisco or even Seattle, clearly following in the Bay Area’s path, at the top of the tech pyramid. But Seattle, once relatively cheap, has become more and more expensive, with the nation’s fifth-highest rents; already, some 45% of local millennials are considering leaving because of the high prices. Even rising Denver is facing a price squeeze, and a mounting exodus.

Cutbacks in H-1B visas could create labor shortages in particularly immigrant-dependent places like the Valley, where most tech workers are foreign born. To appeal more to domestic workers, tech giants will have to accommodate them in lower-cost places. Apple already has more than 6,000 employees in less costly Austin – roughly half the size of the company’s spaceship headquarters in Cupertino – including a hardware engineering division. The tech giant has very few openings in Southern California, but 10 times as many in Texas. Rapidly expanding Amazon is looking for a second headquarters, presumably in a lower-cost area, and has held many of its recent job fairs far from the West Coast. Google has been expanding most robustly in Colorado and Austin, as well as downtown San Jose. Facebook is expanding in lower-cost areas like Ohio.

So contrary to popular belief, growing dispersal, not consolidation, represents the future of STEM employment. Not every smaller city will win, but some may well become serious players in the tech game. As costs intrude and tech itself morphs, competition for STEM jobs will spread, and other regions will begin to impose themselves on the nation’s high-tech map.